20VC: Why Financial Models at Seed, $5M Seed Rounds & The Fear of Signalling Risk is all BS | Why Multi-Stage Firms Have Destroyed Seed & Who Wins and Who Loses in the Next 10 Years of Venture with Adam Besvinick, Founding Partner @ Looking Glass Capital

0:00When you raise 5 million at 25, you have a target on your back before you've even written a single line of code. Giving someone 5 million dollars and 4 years to figure it out is a luxury of a billion dollar venture fund. You need to have at least 24 months of cash. If you can't find product market fit by being that disciplined over a 2 year period, you probably didn't deserve to raise more than 2 .5. Welcome back to 20VC with me Harry Stabbings and it's been a while since we did an inside baseball VC show. And so to date, that's exactly what we're going to do. joining me in the hot seat is Adam Bezvanik, founder of Looking Glass Capital, a pre -seed -focused firm started in 2020.

0:35And before starting Looking Glass, Adam spent five years at Deep Fort Capital, an Anchorage Capital, investing in pre -seed through Series C, Adam's portfolio across funds, includes the likes of Big ID, Transfix, Nom, Nom and Home Health, to name a few. But before we dive into the show's day, this episode is brought to you by Tegas, the go -to research destination for bold investing. Tegas curates expert insights, analysis and financial data to give you powerful perspective for your investment decisions, with lightning fast access to over 60 ,000 transcripts across 20 ,000 companies. You'll discover a wealth of unique insights to fuel your fundamental research, gained perspectives, synthesize information, model outcomes and ultimately made better decisions.

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2:51Hello. You have now arrived at your destination. Adam, I am so excited for this. We've been back and forth on Twitter many times. I've wanted to make it happen for a while, so thank you so much for joining me today. Thanks for having me, Harry. I'm excited to be here. Well, we're going to start with a little bit of context. So tell me, how did you make your foray into the world of venture and make those first moves? Honestly, I joined Twitter in 2009. That was my entry point into understanding the world adventure. And so I just started following dozens and dozens of VCs on that platform, going back and forth with them when I had like 200 followers and use that as a platform for the eventually cold emailing hundreds of investors, trying to figure out how to move from traditional finance to venture and ultimately ended up working for Chris Sofka and Lowercase Capital while I was in business school off of a cold email to Chris and then diligently following up with him until he gave me some work to do basically.

3:47Before we get him learn from Waking with Chris at such a young and formative stage of your career? I think the number one thing that I learned from Chris was his difference for founders, the absolute respect that he has for entrepreneurs and how that translates to your reputation as an investor. And the thing that I think is so critical as a young VC and really hopefully that's compounds over time is that reputation is the number one currency as an investor that you have control over. From working with Chris, I sort of developed this hypothesis that if you have a great reputation that should compound over time, should yield higher and higher quality deal flow should yield higher and higher quality references from other founders and ultimately give you the best possible chance of picking the best founders.

4:25Do you feel that many VCs today still hold reputation as the number one currency? There's a difference between reputation with founders and reputation with other investors. Your reputation with founders needs to be sterling. Your reputation with other investors, ultimately I think some people take different tax as to how they appreciate that one way or another. I personally have always felt that if you have a great reputation of other investors That should hopefully allow you to be brought into other deals Allow that you respect that you're gonna punch above your weight on the cap table and other investors want you on board Maybe not every investor operates that way, but reputation with founders is something that you can absolutely not compromise on When you think about all that you know now and you go back to those early days following VCs on Twitter What do you know now that you wish you'd known when you entered before we dive into fun models?

5:10I think the number one thing is probably it comes down to a mindset issue when I originally started getting coffee and Jumpy on phone calls with VCs I was blown away by the fact that so many investors felt like it was better to see an amazing company and pass on it They never see it at all and as a 24 -year -old at the time that just blew my mind like it couldn't wrap my head around the fact that you were more Comfortable seeing something amazing and passing on it and that becoming over or Instagram or any iconic company I sort of had this notion of a as someone who was not doing the job that ignorance was bliss I would rather not see that deal and not have the sort of regret living with me every day that I missed this thing I've been doing venture out now full -time for almost a decade But now as someone who runs their own fund and is doing this for quite a while I 100 % understand that feeling where you would much rather be in the flow You would much rather seeing the multi -billion dollar outflow and passed on it then have never seen it at all I agree with you totally But I do also think there's this unwavering belligerence around having to see every deal.

6:10I don't need to see every deal. I just need to see enough of the great ones. And actually I find that so many can have such a scatagon approach that actually they're not focused and targeted enough. I'm okay missing a deal if I'm working on something great as well. Do you see what I mean? Absolutely. You're feeding my argument for my thematic style of investing. Okay, well let's go to the fun then. But first I have to ask why looking gloss is the name before we dive into model? There's definitely an illusion here to Lewis Carroll and Allison Wonderland and sort of through the looking glass and I think the fantastical elements that are necessary for what some of these founders are building the sort of suspension of disbelief that's required for investing in something that's pre -product, pre -revenue, pre -everything sort of the idea that if you put down a pros and cons list for virtually every investment I've made, the cons would significantly outweigh the pros, but yet I've still said yes 27 times in the last nearly three years.

7:03That's where the name comes from. I want to start on looking glass. What is the fun size? And why did you decide that as the optimal size? The fun that I'm currently investing out of now is a $20 million target. And really I chose that size because it felt like it was incremental from fun one. So fun one was a little over eight and a half million dollars investing 300 to 400 K pre -seed and and very early seed rounds, so really 750K to $3 million rounds. And so I felt like the step up from eight and a half to 20 was iterative enough for me to essentially go from 300 to 500K, only 400 to 500K, incremental shut the step up and check size, allow me to invest in 30 companies versus 24, but still maintain the exact same entry point.

7:44I'm loving this already, because I'm just going for it. Okay, so we have 24 companies in Pham One. That's a pre -seed fund, very, very constrained in terms of number of companies. Do you think you can do a pre -seed fund with that a few companies being 24? I think you can if the ownership is sufficiently high enough. My goal with the fund was to make sure that every investment can move the needle and return the fund with a billion dollar outcome. Fundamentally, I believe if you're investing out of a $50 million fund or smaller, a billion dollar outcome has to return the fund or this job becomes even harder than it already is.

8:17All things considered, I would have rather had more like 27 companies than 24, but I was operating within the constraints of a smaller fun size. With Fund 1, I did own 86 Bips at exit of a billion dollar outcome to return the fund. My average ownership was close to 4 % on average at entry across Fund 1. So even if I get diluted by 60 -65%, which I expect to over the life of that investment, I'll still own well north of 85 Bips. In fact, if I get to do it by 60%, I'll actually own 1 .7%. So a billion dollar outcome, two X's my fund. My question is, what was the average entry price on those deals?

8:539 .1 post. I saw 525 for the last three years. Where were you fishing? That's part of the strategy. I don't operate amongst the regular way seed investors, or at least the multi -stage seed investors that have driven up the price of seed valuations significantly and are still doing so. My strategy is to make sure that I'm part of the first money into rounds. Ideally, first yes I literally owned the domain first yes .vc redirects to the looking glass website the deals that I've done over the course of fun to have been 6 million cap 8 million cap 8 million cap and I'm stretching on one now. It's 11 million cap This is all first money into companies over the last eight months, but I wouldn't last you that 8 .4 It's quite a nice fun size to raise for its individuals 100k to 250k jacks 20 uncomfortable you're too large really for those institutions really to start stacking up and making a difference and you're too small for really other institutions to want to Invest at that stage without hitting you know 10 20 some thresholds Why did you choose 20 and is that not the hardest fun size to raise for 20 is definitely not the easiest Fun size to raise for I'll put it that way, but really it came down to I'm trying to build a firm over the next 20 to 25 years and and I wanted fun to be an iterative step up from fun one.

10:10And I felt like going from eight and a half to 20 allowed me to incrementally increase my check size in such a way that I was very comfortable doing so. LPs don't require a major leap of faith to believe that I can go from writing a 325K check to writing a 425K check on average, promoting 4 .2 % on average, tuning five and a quarter to five and a half percent on average. These are baby steps in terms of increases that I felt like were very easily under -righted. Now, in terms of LP type, yes, that fun size definitely plays below the sort of normal threshold of institutional LP's. I generally think 40, really 50, is kind of the floor for a lot of those groups.

10:50And so I'm living in a world of smaller fund of funds and family offices and high net worth individuals who sort of look and act like a family office but they don't have a family office sort of. That's to be created yet. That's generally the majority of LP's. Oh, on the fun raise, what dogs do you have ready? How do you think about the materials that you need to get in place to go out and raise? That's a big lesson learned from fun one. I started having conversations and people were like, send me sub docs. I was like, oh no, I don't have sub docs ready. Now, I air on the side of formality in terms of data room and materials.

11:21And I write an investment memo for every single investment I make, even though it's just me reading them. So every single one of those investment demos is in a data room that LPs can pour over and see my thought process at the time of investment. and every LP update I've sent out, I write a very lengthy letter every eight weeks, that's very transparent on every company in the portfolio of LP's, so potential LP's can see how I communicate transparently and regularly with my investors. And then obviously of course, deck and appendix to that deck and statement of investments and all the necessary legal docs.

11:52How do you advise founders on the docs they need to get ready? The one thing that worries me when I hear you speak there is that's a lot, respectfully, LPs often don't go through docs that efficiently. Do you worry that one LPs are not engaging because there's too many? And what advice would you have to found us on the doc preparation element? I do sometimes wonder if there's like paralysis by analysis. My philosophy as an investor and founder of this fund has always been to air on the side of providing more information to LPs and if they so choose not to engage in it, then that's fine. It's the same way I tell founders after a first meeting if they have a one piece of material after another and rely on me to ask a question that like unlocks another door for me to see something just throw it all at me and I'll pour through it.

12:37Do you sound the deck ahead of time before the coup? If it's required to start to get a conversation going for sure either through an awardment row or because someone insists upon it, I've never walked through a deck on a call. I don't think that's really necessary as an investor in the same way that it is as a founder who has like screenshots and competitors to show and revenue charts like I just don't think that that's as necessary as a as a DC. Okay, it was you and you said revenue charts that I know why you invest. Do you expect founders to have financial models that precede? No, of course not.

13:07My general view is that a financial model if a founder so chooses to have one it's a great level of insight into what they think the drivers of their business are and the levers that they can pull over time but ultimately I am fully aware that what I'm underwriting is 100 % going to change and not I mean, I was an investment banker in a previous life. I know I can make a model say whatever I want. It doesn't matter what the model says. I just want to understand that the founder knows what the drivers of their business may end up being over time. I want to give out to the LP process before we leave that.

13:37How did you get the majority of your LP instructions? Before I started the process, I spoke to our mutual friend, Somal Shah. Somal said, the only people that are going to invest in your first fund are people that know you. I was like, I invest in founders all the time that I don't know. He was, this is different. He was almost 100 % correct. Every single LP and fund one is someone that I knew personally over my prior years and years in and around the early stage Tech ecosystem if they weren't an LP I knew before the fund one process They came from an intro from an LP who said yes to fund one and then introduced me to somebody else That is continued to be the case for fund two as well.

14:13What type of LP composition do you have? Fund one. It's a lot. It's probably north of 80. Okay north of 80. How many meanings did you have? It's hundreds. I've had hundreds of meetings with potential LPs ranging from the individual who wrote a 10 to 25k check into Fun1 to the family office that's done 10 % of Fun2 and everything in between. And so we had 81 that all individuals. Virtually all. There's one corporate investor in Fun1 who's also in Fun2. And then what does it look like for Fun2? Does the profile change? Higher net worth individuals. More official family office types in Fun2 that I either didn't know when I was raising fund one or that wanted to track for fund one and then newer fund -of -fund style investor that have emerged.

14:59Did you notice different desires in the different profile types? One of the biggest surprising things to me from over the course of building this firm is how people interact with money and make decisions around money, particularly individuals. The way that people think about investing in relation to their network and relation to risk is I've been shocked by the dollar amounts that some people have committed both way smaller than I expected and way larger than I would have anticipated. It's generally indicated to me that you can't come close to sizing up, at least on an individual LP, like a high net worth individual LP.

15:35You can't handicap what their check size is going to be unless they explicitly tell you because I've been shocked both directions up and down. When it comes to professional allocators and family offices, my strategy is very inside baseball VC and so if you don't have an appreciation for the nuances of venture capital as a business, then I don't think you're going to say yes to invest in my fund. You might not necessarily appreciate the strategy that I'm employing. Can I ask do you have a minimum check size? Yeah, it was 100 on a fund one and 250 on fund two. Why do you have that? Like what my best deals have come from a 25K head of product.

16:12I've broken it for the right people who have the right network, who I really wanted to be involved in helping me get off the ground and build this business. Okay, so we have that in the minimum. How do you enforce a sense of urgency? We both know LPs, they can be a little bit slower. How do you kind of get them over the line when you feel they're around the hoop? I think that's the absolute hardest part of fundraising as a fund manager. LPs smell a bluff a mile away. That deadlines you to come and go and say, they all would happen to that date. And so the way that I've tried to demonstrate, since the urgency is really by demonstrating compelling momentum.

16:44So it's consistent updates and conversations with LPs to share progress and markups from fund one, sharing new investments on fund two, who was co -invested with me that they might be LPs and that fund already using those investors as catalyst for demonstrating that there's inertia with this fundraise and that they should be a part of it. That compounding of updates and progress to me as the best way to demonstrate less of a sense of urgency and more that like I'm putting one foot in front of the other every single day. There are other people that are getting these updates to not just you on closes.

17:17How do you approach first closed final close? What was the take there and how do you advise managers there? That was a huge lesson learned from fund one. I was fundraising during fund one through lockdown and peak COVID. I had a lot of gps invest in fund one and they said do it first close as soon as you have whatever number I had Which I thought was way too small to do it first close on on fund one and they're like just get going Just put points on the board just be in the game And I frankly probably waited too long to do an official first close on fund one. What did you put as a threshold? I think I was trying to get to at least 50 to 60 % of the fund before doing that first close Now my rule of thumb to other founders would be get to 50 % of your minimum viable fund size and then do the first close If your minimum viable fun size is 10, you got to get to 5, even if you're trying to get to 20.

18:06Your minimum viable fun size might not be 50 % of your target, but if it is, effectively, you're trying to get to 25 % of your target to do it first close. And then invest like you're not going to get beyond your minimum viable fun size, because if you do, you're going to end up with a portfolio that's way too small if you end up with a number that's a lot lower than your target. In terms of like what you know now on fundraising that you wish you'd known at the beginning, what do you know now that you wish you'd known at the beginning? I would say you need to figure out the phenotype of your LP quickly.

18:37Figure out who the LP is that's going to understand your business. It's really no different than a founder who needs to find the VC that really understands their business. this, LPs are obviously a little bit more challenging to put into a box, but I've definitely can describe the LP who is a good fit for me way more easily now than I could three years ago. And so when I talked to other LPs and I asked for intros or when I talked to managers and I asked for intros, it makes it a lot easier for those people to say, oh, I know exactly who is a good fit for you. I want to discuss the strategy. You said that and it kind of touches on that.

19:12You said it's right like inside of baseball inside V .C. What makes you say that? Because we heard earlier 24 to 30 companies between funds, if three to 400 K, 4 % average ownership, what's the inside of baseball element? The strategy that I'm pursuing of being a pre -seed investor that takes a much more institutional approach to investing in discipline is definitely uncommon. Most sub 40 million dollar funds, really especially most sub 25 million dollar funds, have way more investments, they write way smaller checks. It's not necessarily spray and prey, but it definitely is more of a scattershot approach.

19:48I just don't deviate from the strategy that I'm pursuing at all. I don't make any compromises around it. I'm never going to be like, oh, I got a 75k allocation here. Yeah, I'll do that one. I stick to my target check size range. I stick to my target ownership, which is an average ownership across the portfolio. It's not like every single deal has to be in there, because I know that some are going to be higher, some are going to be lower. It really comes down to a lot of what I learned investing at Anchorage prior to starting looking less. I was surrounded by credit investors who took a very conservative approach to investing.

20:19Credit investors think everything is going to go wrong. VCs underwrite everything going right. It required me to be incredibly buttoned up when I evaluate companies, when I went to investment committees to pitch them. And I think that mindset actually not really all that helpful at the pre -seed stage, I think it actually is quite helpful when it comes to instituting a set of guide rails and allowing me to focus on what I invest in and what I don't invest in. Adam, do you worry about adverse selection? You know, when I look at a fun one, I'm being very open here in a way that I've never been for the show.

20:50Be real, pre -seed 60K check, linear 100K check, remote 50K check, some of my like, on paper definitely best investments. I always went for 250, like broke the rules there and they're the ones which were bangers and my 250's are like Yeah, that'll be fine But actually the exceptions is where I've seen the alpha Do you worry about that and how do you think about if you should make exceptions? I do think that having this set of rules Allows for when you do want to make an exception. It's very clear why you're making that exception right like the more constraints you put in place, the fact that when you do want to or need to make an exception, it means that it's reached some level that you thought might be previously unattainable.

21:35So for instance, in fun one, I have an investment that I made that was outside of my valuation range. The round size got larger after I had committed. I wasn't going to back out. I still got my 300K allocation, but the round size got larger after I committed a bunch of people piled in. I wasn't going to tell the founder, oh, sorry, I'm not in anymore because you raised four and a half instead of three, like if anything, the optics were, the steel was even more compelling now than it was when I said yes. And this team is by far the best executing team I've ever worked with in a decade of being in venture.

22:06Bar none. And so I obviously am very happy that I didn't compromise on my valuation rules and I've stuck to that, yes. If I believe that I'm getting adversely selected because I'm getting my allocation, then I should probably just quit doing this job. I have to have the confidence to believe that I'm getting into deals at the target check size that I want and founders are selecting me because they believe that I'm a great fit for them and I believe that this is a great company. If I thought that every investment that I made was open to me writing the full amount that I wanted to because they weren't getting anyone else to say yes, I definitely couldn't go to sleep at night.

22:41My philosophy has been and be a first yes, lead around set the terms, commit early, and then basically put on my investment banker hat and become placement agent, help bring in the rest of the money into that round by going to a select group of investors that I feel are highly complimentary to me that might not be household names, but I know are gonna be awesome value ads to this business. Can you lead rounds if you're not the biggest check item? I guess it depends on how you define lead. Like I saw Jason Lemkin tweet the other day, like a lead investor is the investor who writes the next check when nobody else will.

23:13If that's the only definition of a lead, then no, like, I'm investing out of small funds. I can't necessarily justify writing follow -on checks. To me, that's not necessarily the only definition of a lead. To me, the definition of a lead is one that helps catalyze, erase, the one that sets the terms, the one that's the first call, the one that's the most responsive to that entrepreneur when things are going terribly. It's the investor who helps compel other investors to say yes to that company, both at the time their investing as well as in subsequent rounds. Adam, do you ever get big multi -stage funds coming after you've committed and say we'll put down three on 15 or four on 20, kill that pre -seed round?

23:52You're way better than this founder. Do you ever get that? No. In fact, I've had general catalyst, true ventures, tribe, lower carbon, forgetting others that have come in after me, after I've said yes, and have not altered the terms of those rounds. And you don't find your check size uncomfortable in terms of like unfriendly. The thing I worry about with the three to 500 ranges, it's a lot of angel checks in that one bulk and you're not really big enough to also take more than 6070 samples out of the round. Do you see what I mean? I haven't found it to be a challenging check size. So as I said in fun one, the ranges were 750K to 3 .5 million dollars, it's 4 million dollar round sizes.

24:32I got what I was looking for in virtually every single investment. I don't think it's that unfriendly. I've come into rounds with a 300 to 400 K check after there was already a lead. So it didn't prevent me from getting what I was looking for. A quintessential round for me would be one and a half to two million dollars at a six to 10 post down the middle of the fairway, you know, structure for me. If I went right to 500 K check, if there's a $1 .75 million around and they already have a quote unquote traditional lead who's taken a million, I can still get 300 to 500 K. And it's on me to compel that founder to give me that allocation.

25:05It's on me to sell them on why I should have that much of the remaining 750K. I'm not bashful about preemptively having founders give references to other founders. It's a key part of why I'm investing in a thematic way, is that I can build instant credibility and rapport with a founder building in healthcare because I can probably point to half a dozen other companies in the portfolio that are super relevant to what they're building that might be customers. If I do cold outreach to a founder, which I've done in probably half a dozen and investments I've made so far, I immediately invalidated their mind because I have a portfolio of very relevant companies that they care about.

25:40How do you think about loss ratio? How many to expect to fail at this stage? It's not a home run game, it's a grand slam game. There's gonna be companies that inevitably go to zero out of 24 companies. There's only a few that make me lose sleep at night right now, call it three years in. But ultimately, I know that the vast majority of returns are gonna come from 20 to 30 % of the portfolio. and I'm comfortable with the inevitable zero or less than one X that's gonna make up 40 to 50 % of the portfolio Call it eventually eight to 10 years in when you look at those ones that keep you up at night Is there something that now you would have seen when you look back?